Tuesday, 2 April 2013

Dealing with Increasing UK Poverty

I ended a recent post with the following: “Surely it should now be clear that this is a government with at least as strong an anti-state, anti-poor ideology as Mrs Thatcher, but with rather less honesty about what it is doing.” For someone who tries to avoid hyperbole, this is pretty strong stuff. So where is the evidence for this claim?

The anti-state side should be familiar to regular readers. Once you realise that the austerity policy has no sound basis in terms of macroeconomics, and the markets are saying ‘please supply more UK government debt’, then you look for other motives. A desire to shrink the size of the state seems to account for both the composition of the austerity programme, and the refusal to undertake a balanced budget stimulus. I have obviously focused on this macro issue, but the anti-state focus of policy is also pretty clear in the NHS reforms, and in the push (I could use a stronger term) to create academy schools.

What about the anti-poor part? This is not my field, so the evidence I present below may not be the most up to date or complete. However I think its worth setting out the evidence as I see it, because it does not get the publicity it deserves. Here I focus on the standard measure of poverty, which is the number of people with income below 60% of the median for that year.

Poverty increased across the board in the decade of Mrs. Thatcher, although of course correlation does not establish causation. What is really noticeable since then has been the decline in pensioner poverty, which can be seen as a success story for government action. Poverty among other groups has been relatively static. Given that the 1997 Labour government made reducing child poverty a major priority, the relatively small reduction there is disappointing, but it was not for want of trying. Researchers at the IFS estimate that had financial support merely risen with inflation, child poverty would have risen by over one-quarter to around 4.3 million by 2010. [1]

So what of the future? The following table comes from another IFS study that tries to estimate likely levels of poverty out to 2020. It is out of date in that it takes no account of cuts in welfare provision announced by George Osborne in November last year, of which more below.

So poverty is going back up. [2] This is a direct result of policy. The study estimates that “the impact of changes to personal tax and benefit policy announced by this coalition government is to increase relative child poverty by 200,000 in both 2015-16 and 2020-21, and to increase relative poverty for working-age adults by 200,000 in 2015-16 and 400,000 in 2020-21.” “The main culprit is the change in uprating benefits from the RPI to the CPI.”

Yet this is out of date. In the pre-budget report in November the Chancellor announced that uprating would be further reduced to 1% for three years. So the likely increase in poverty is even greater than these figures suggest.

As the government is creating this increase in poverty, how are they going to deal with the problem? The answer seems to be by stigmatising the poor. The Chancellor famously said “Where is the fairness, we ask, for the shift-worker, leaving home in the dark hours of the early morning, who looks up at the closed blinds of their next-door neighbour sleeping off a life on benefits.” Unfortunately this line appears to resonate with a growing hardening of public attitudes towards welfare provision. This in turn reflects a persistent tendency of particular tabloid newspapers to run stories about benefit scroungers. [3]

For example, Randeep Ramesh writes “Stories referring to large families had more than doubled in frequency since 2003, accounting for some 7.4% of articles. The facts are that families with more than five children account for 1% of out-of-work benefit claims. Very large households with ten or more children are a staple of tabloid shock stories: there are, according to DWP, 180 such claimant households in Britain.” As Ian Mulheirn points out here, using Department of Work and Pensions research, the percentage of those claiming unemployment benefit whose previous work record suggests they are trapped in a dependency culture is pretty small. So the facts do not support the rhetoric, which of course politicians know, so the rhetoric is part of the strategy. (There is also an unwillingness within government to try and model the impact of reforms, as Alex Marsh notes.)

Thus the solution of how to ‘deal with’ poverty is to return to Victorian attitudes (HT Mark Thoma, who also has this nice historical account from the US.) There is even the suggestion that UK ministers might change the statistics to reflect the idea that poverty is a result of character rather than circumstance. Dependency is always an issue with welfare, but as Brad DeLong writes here (and James Kwak here), it does not warrant hysterical overreaction.

When the charity Save the Children recently launched its first campaign to help UK families in poverty, the reaction from conservative MPs and the right wing press was predictably to blame the messenger. Perhaps they think the rapid growth of food banks in the UK of the last few years is also politically motivated?

[1] My reading of this was that in the case of child poverty (and unlike pensioner poverty), fiscal measures were fighting against the effects of greater wage inequality.

[2] These poverty measures are sometimes criticised because they are relative, and disguise the fact that everyone’s living standards are going up. I think this criticism is misplaced, but it is worth noting that it does not apply to the recent past and near future, where real incomes in the UK have tended to fall.

[3] I’m often surprised at how social scientists are reluctant to give newspaper reporting the importance it deserves in shaping certain social attitudes. We are often told about the ‘puzzle’ that people’s perception that crime is increasing is at odds with the fact that it is falling, yet given how crime is reported, I see no puzzle at all.

11 comments:

1. I am not sure if it can be called anti-state and certainly not anti-poor. The state Osborne and Co probably ideally want is still large seen nearly every developped nation outside Europe. Poor receive massive transfers in countries like the UK so probably less-pro-poor would be more appropriate.2. Anyway probably the consensus in Europe in general is that the welfarestate needs a too large slice of GDP. Probably even now, but certainly in the decades to come when aging hits in and extra costs thereof for government are likley in the 10-15% of GDP region (mainly statepensions and increased healthcare. So one way or another welfare/transfers will be cut. The issue open is still who will be thrown before the bus and how hard.Not clearly communicated to the voter as usual with bad news but still in the pipeline.3. My idea is that especially the groups you are referring to will be hit. If a choice has to be made who to cut it will always be the ones that havenot contributed. Your poor.4. Which brings us to the next problem. In a country like the UK (probably the same all over Western Europe) approx. 20% (UK might be even more) is simply dysfunctional as an employee. Seen the wagescosts only an absolute moron of an employer will employ these people.So these are the people that are structurally unemployed, but also are the first ones to be fired in a downturn. Not necessarily lazy (my guess would be not), but simply too stupid, character problems or other problems.5. A lot of poor pensioners are most likely in this group. Not being able to fund a proper pension.6. The challenge for every government will be to get as much as possible of people in this group to work and which modell to use for that.Which will be pretty difficult. Basically now they are wholely or partially bought off because that didnot work (getting them to work).7. Seen the cost of living it will be hard to cut payments. So it likely goes via eg increases well below inflation. Adjust the definition (as Merkel did recently).8. Possibility to increase taxes. The UK and effectively the whole of Western Europe looks too expensive so there will be very little room for that. Growth looks marginal at best not much room there as well.

So in a nutshell a difficult political problem. Can you cut middleclasses (European definition) to a level that they are heavy payers but receive very little to pay for the poor.Having to save now for it, effectively leading to a drop and a substantial one in income. Will be a hard sell. A huge part will be immigrant (non-Western) (taking figures from some European countries), probably around half. Will not be good for social stability.

So my guess is that at the end of the day the poor will be thrown before the bus. At least largely. Only probably harder by the Conservatives than by Labour.I would however not be surprised that Labour splits on this (like we see now in Holland). Dutch Labour (Blairish) as representative of mainly lower-middle incomes (and vested interests). A group that has a lot to lose when cuts will be for everyone. And Socialists (welfare receivers), tax the rich (better everybody else to keep paying for welfare).

Will be interesting to see how a country like the UK or in any other Western European deals with this. Not only an increase in poverty but also a more poorer poverty.

Very interesting article, Professor. What do you think of the argument that globalization has exposed low-skill workers to the competition of billions of labourers in the rest of the world and that this phenomenon is largely responsible for the decline in living standards of the working class in developed countries? If this were true, is there any way to support those affected?

(On the brighter side in a world of low growth, your hyperlink usage is booming!)

Just in case Simon does not answer your question Mr Toad - I will. You are quite right in supposing that globalization is the primary source of most of our present woes - particularly the growth in poverty and inequality. Academic economists generally refuse to admit they got this wrong. Mainly because they lauded free trade for decades, using often fake or misleading arguments. Here is the real story.

Suppose we initiate trade between two regions, call them home and foreign. Home is capital rich/labour scarce whereas foreign is capital poor/labour abundant. We assume also that foreign can produce at near the efficiency of home and that capital is internationally mobile (which in the real world it surely is).

Firstly, theory tells us that both home and foreign will, driven by price signals, restructure their economies to produce at alternate and mutually beneficial points on their production possibility frontiers (ppfs). Global output expands and home and foreign share the benefits. Although wages at home may fall due to a move toward more capital intensive production, it is likely that real wages will rise from the income effect of a fall in prices. So far so good. That is the basis of modern trade theory encompassing Ricardian comparative advantage in efficiency and Heckscher-Ohlin (HO) factor intensity advantages.

Problem is, this is far from the whole picture. When the capital/labour ratios between home and foreign are far apart, trade alone cannot equalize factor prices. This will leave wages higher and rents lower at home than in foreign. Rentiers (the owners of capital) will then have an incentive to move capital from home to foreign in search of better rents. So begins the slow transfer of productive capital from home to foreign. In a static model, the ppf at home shrinks (economy contracts) and the ppf of foreign grows (economy expands). Real wages at home must now fall as labour is less productive (having less capital to work with). Meanwhile, rentiers at home are big winners; receiving higher rent from their capital transferred to foreign as well as earning higher rents at home (capital is now more scarce there). The labour share of national income falls and the rentier share rises leading to increased inequality.

This immiserizing scenario only terminates when factor prices (rents and wages) are roughly equalized. We are many decades away from convergence so the constant capital drain will continue into the foreseeable future.

There you have it. In a dynamic scenario the above model predicts real wage stagnation, growing inequality, slow economic growth and falling labour productivity. Recognize any of that? It also implies a permanent rise in structural unemployment as the economy is constantly readjusting to changing capital/labor ratios between home and foreign (trade cannot find an equilibrium in this environment so restructuring is never ending). This is on top of unemployment caused by downward wage stickiness.

To add insult, the home economy becomes difficult to manage. A downturn is protracted by the constant capital drain which continues even while capital investment at home falls. As a consequence, potential GDP gradually evaporates. Apply fiscal stimulus and the result is simply to pull in imports and cause inflation as spending tries to close an output gap that is no longer there. Capital investment in exports fails to materialize as the capital for it is invested abroad. Even though economists do not understand this bond markets implicitly do. They are aware home will have difficulty exporting out of trouble and will begin to look at even modest debt through a very dark glass, further limiting what home can do fiscally.

You will not see this explanation in any textbook on international trade despite it being supported both by mathematical models and computer simulations. Economists will not listen to any argument that opposes the mantra of free trade and globalization and appear to be in a state of denial on this issue.

The purpose of the rhetoric is to foster hatred of the unemployed. Having made people with low paid jobs angry at those with no jobs, the govt can go on their way undisturbed. It's called divide and rule and it works a treat, provided Idiot Duncan Smith keeps his big mouth shut.

To continue, I know what the Tories are but what shocked me was the ruining of Labour under Blair. All Labour came to represent to me under Blair was the pseudo renewal of Empire. Now there is no Labour opposition to the Tories in effect.

I fear the future for the UK poor may be even nastier than Simon suggests, as some components of the burden of support (eg Council Tax benefit) are transferred from central government to local authorities, and made ‘optional’. It will be almost costless for affluent areas to provide such benefits, since few of their residents will be eligible. But the burden on authorities in poorer areas will be much greater, and since it will be borne by their own council tax payers (who are likely to be relatively poor themselves) it will increase the stigmatisation of the poor, and the resentment felt by the low-income taxpayer.I also fear that if the Government actually tries to move back from the post-1945 welfare system to a Victorian alternative based on 'less eligibilityy' and private charity the outcome will be devastating. The links of religion and local sympathy that allowed the Victorian system to work (in an inefficient and often heartless fashion) have disappeared. The 19th century landowner and legislator at least knew the poor man at his gate by sight and believed he had a Christian duty of charity towards him (particularly if he was a former employee on the estate): he encountered some of the poor frequently, if only because they were his domestic servants. The modern politician moves in a rich man's bubble between the virtual gated communities of Notting Hill and the Cotswolds. Like Simon, I teach Economics at a UK University: my students spend their vacations undertaking internships at investment banks, not mission work in the slums.Historically, much of the initiative for the British welfare state came from the shared horror of two major wars in which all groups in society participated on equal terms. There is a sense in which public subsidised housing was the reward for national sacrifice in the First World War ('homes fit for heroes'), just as the NHS was the reward after WWII. As the memory of these events has faded, so has the feeling of community which they engendered. It's also true that one reason why the UK saw itself as able to provide a high level of welfare spending in the period from 1945 to the 1970's was the fact that the rich accepted high levels of taxation (they were at least slightly lower than wartime levels) and had limited scope for tax avoidance (because of the persistence of wartime exchange controls). All of these factors have now disappeared, and the Tories have also seen that if the rich can be protected from taxation (through localisation, or the argument that there is no point taxing the rich because they will move offshore, or hire a better accountant) the provision of welfare becomes a politically valuable source of conflict between the tax-paying and welfare-receiving 'poor'. Thus the benefits that are acceptable (and largely protected) are those such as pensions, which largely redistribute across the life-cycle rather than between individuals, or the NHS, where there is an insurance argument which is clear to all. The response to other forms of poverty will be stigmatisation, denigration in the national press, and (I continue to hope) at least the grudging provision of the minimum needed to maintain life.

Solidarity is simply on the way back. Whether this is a temporary issue or not still remains to be seen.Probably the following issues are also relevant:-socialist movement was originally more for chances than for a welfarestae. And they appeared for a large part to be right. Basically more than half the workingclassgroup moved upwards. However what we see now is extremely low social mobility (while the possibilities are much better than H1 20th century). What is left behind has apparently very little talent for social mobility.People whoi went up with hard work usually donot see why others should be given from his taxmoney even better opportunities.-people are moving around much more. Solidarity with people in your own neighbourhood is simply bigger than with people you donot know. Sometimes coming from another part of the world, often hardly speaking English.-archetypical lefties give the right half of the world (and a lot of desillusioned lefts) red spots and foam on the mouth. It looks clearly time for a new sort of leadership imho. Blair modernised the policies (whatever you may find of them) and went half way with that but things are moving fast.

It looks like an issue that needs attention from whichever political tribe you are.It has moved in chances for children, social mobility from that group is very probably historically low. Possibly also to do something with the group itself. But anyway all are substantial cost-items, one less means likely fever cuts for the remainder.Wages at the bottom side of the labor market will hardly rise if they will rise at all, simply by international competition. transfers are a percentage thereof. With both that perecentage as the wages based upon down it will drop quickly.It is extremely expensive to live in a Western country. If you include entitlements the costs of somebody at the very bottom in the UK would allow for a very convenient middleclass (upperside thereof) lifestyle in a lot of the rest of the world and with a lot better weather. This is also one of the reasons for poverty.

Anyway it is about time if the people that want to remain the welfarestate in Western Europe (so you have to do that without me) start to work on these issues. How to make it financially and socially sustainable. Including questions like how to deal with people with an earming capacity below the social minimum. How to remain the standard of living of as much as possible people, without taxing the rich to Switzerland and without funny macro stuff like 1 Tn coins.

Problem with your view is that when people start to arive at what you see as the border there will be no time anymore to make the necessary corrections and things will go the hard way. Looks clear that the ideas have to come from people like Simon and yourself, politicians donot give much hope in this respect don't they?

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